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The past two years could hardly be more divergent -- in both market terms and in the results of the Barron's/Lipper Fund Family Ranking.

Last year marked a significant -- and much-needed -- change in the markets. Stocks surged (the S&P returned 16%), driven by financial and consumer-discretionary companies, as investors became more comfortable with risk and consumers became more comfortable spending some money. High-quality fixed income finally lost some steam, returning just 4%, though there was some money to be made further out on the risk curve, particularly in junk bonds and private-label mortgages that aren't guaranteed by Fannie Mae or Freddie Mac. The bullishness was refreshing.

Scott Pollack

Few can forget the nuttiness of 2011, when fund managers faced a host of never-before-seen issues -- the downgrade of U.S. debt and the European economic crisis, to name just two of the most confounding. Investors whipsawed between "risk-on" and "risk- off" investments that year, but it was ultimately the more conservative portfolio managers who won out. Anyone who stuck to utility stocks and consumer staples did pretty well; and let's not forget about how well Treasury bonds performed, perversely rising 30% for the year. Fixed income overall rose 8%, while stocks barely eked out a 2% gain. Fixed-income-heavy Delaware Management topped last year's list, followed by the typically conservative Vanguard Group, with Neuberger Berman Management coming in third.

That brings us to this year's winners, most of which rose from the very bottom of 2011's list.

Finishing first in the one-year ranking was Putnam Investment Management, which placed 57th and second to last in 2011. Its strong performance in both equities and taxable bonds drove it to the top of the list this year. In 2011, Putnam made some critical, poor calls, including too big a bet on beaten-down financials like Bank of America. Management also "thought that rates would go higher" on the fixed-income side, leading it to eschew Treasuries, says Bob Reynolds, who has been running the Boston money manager since July 2008. "The risk-off trade had come into play, but we had a risk-on trade," he adds.

Bob Reynolds

Company: Putnam Investment Mgmt

Title: CEO and president

Total AUM: $133 billion

U.S. Retail Funds: 105

2012 Ranking: 1

In 2006, when he was still at Fidelity, Bob Reynolds applied to be the commissioner of the National Football League.

He didn't get the job.

But things have turned out pretty well for Reynolds given the improvement in Putnam's investment performance in recent years and all of the headaches Roger Goddell, the current NFL commissioner, has endured.

Reynolds is very bullish on stocks, insisting that investors are missing a big opportunity if they stick with bonds in a world with such low interest rates.

"We would rather be an equity holder than a bond holder," says Reynolds, 60, who took over the Boston-based money manager in July of 2008. "The upside is much, much greater. I don't see how interest rates can get much lower at this point, which puts tremendous risk in the bond market."

It's not that he doesn't see opportunities in fixed income. But "If you just buy the bond index, there is a lot of interest rate risk," he says. It's better to buy bond funds that can neutralize rate risk, he advises.

A longtime Fidelity executive, Reynolds maintains that fundamental security picking has a bright future, the surging growth of exchange-traded funds and other passive strategies notwithstanding.

Mutual funds, he says, are "still the best way for Americans to invest in high-quality management at a reasonable price with liquidity."

Putnam is followed by Pimco/Allianz, powered by its strong franchise of bond funds. The Hartford, which employs Boston-based Wellington Management to manage most of its funds, came in third, while the asset-management teams at two big banks, JPMorgan and Goldman Sachs, catapulted their funds from the bottom half to the top five.

MFS warrants a special mention here, along with TIAA-CREF. Among the top 10 finishers in 2011 for one-year returns, the lone fund company to return to that winners circle in 2012 was MFS, boosted by a strong showing in its U.S. equity funds. The firm's flagship fund,
Massachusetts Investors Trust
(ticker: MITTX), was a true standout: It beat more than 90% of its Lipper peers with a 2012 return of 19.5%. "We're not big on trying to figure out which sectors are going to beat other sectors," says Kevin Beatty, who runs the large-cap core fund that was founded in 1924. Last year, Beatty says, was about "being really disciplined and patient, and a lot of things came back." Winning stocks for the fund included
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(DIS), up 35% on the year.

Though it didn't crack the top 10 last year, TIAA-CREF ranked a respectable 13 and, along with MFS, is among the few firms that didn't dramatically slide up or down the list. The firm did especially well in its mixed-asset and world-equity funds.

In 2012, "What really worked was buying more volatile, riskier stocks; and the market became more tolerant of risk as the year went on," says Paul Quinsee, chief investment officer of the U.S. equity division at JPMorgan Asset Management. Case in point:
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(BAC), one of the riskier bets that bested Putnam in 2011 with its 58% loss that year, proved a much better investment in 2012, when the stock more than doubled.

But the fate of these firms, all of which have tens of billions under management, hardly rests on the fate of one or two good (or bad) calls. The Barron's/Lipper ranking takes the one-year performance of virtually all equity and fixed-income funds into account, though many of the top finishers had about half of their assets in equities. Like other years, performance was assessed in five categories, each with a different weighting: U.S. equity funds at 35%, world equity at 16%, mixed-asset (balanced funds) at 17%, taxable bonds at 27%, and tax-exempt bonds at 4%. (For more specifics, see the "How We Rank the Fund Families," see insert at bottom of story.)

Even though stocks performed well, it wasn't an upward trajectory all year, and the convictions of many managers were tested midyear. Concerned about the deteriorating economic situation in Europe, markets sold off in May and June. Then the European Central Bank stepped in, assuring markets that it would do whatever was necessary to prevent a financial meltdown.

Mohamed El-Erian

Company: Pimco/Allianz

Title: CEO and co-CIO of Pimco

Total AUM: $2.4 trillion

U.S. Retail Funds: 180

2012 Ranking: 2

It's abundantly clear that markets have embraced risk again, but Mohamed El-Erian says the key question "is whether and when economic and company fundamentals can validate the recent surge in risk assets."

What's necessary, he told Barron's, "is a more rapid handoff from supported growth, in which central banks play a very large role," to the point "where the private sector feels more confident to invest in productive capacity, grow markets, and hire."

Known for his incisive macroeconomic observations, El-Erian, 54, is also an astute market observer and frequent world traveler. "Central bank activism," as he refers to the Federal Reserve's quantitative-easing regimen, has driven a wedge "between fundamentals and market prices." El-Erian likens these experimental policies to a "drug company feeling forced to bring to market new medicines that have not been clinically tested."

Nevertheless, the U.S. economy is healing, as evidenced by "recent data on housing, the banking sector, the corporate sectors and the labor markets," he observes.

He sees three big risks, one being "the durable effectiveness of central bank policies." Another is what he views as the policy complacency that has set in after the European Central Bank stepped in to reduce the threat of an economic implosion in that region last year. The third is geopolitics, particularly in the Middle East and parts of Africa.

George Gatch

Company: JPMorgan Asset Management

Title: CEO of Global Funds

Total AUM: $1.4 trillion

U.S. Retail Funds: 132

2012 Ranking: 4

"Obviously, risks remain, but it's a less dominant part of how investors are thinking about the market," observes George Gatch, 50. "Risk assets and valuations are likely to improve."

Translation: The time to invest in equities has arrived, whether it's U.S. securities or overseas holdings.

Gatch isn't as bullish on fixed-income holdings: "Investors need to be more cautious about fixed-income investing, particularly because investors have been less diversified in their fixed-income portfolios." Investors, he says, have been too emotional about their portfolios, leading to costly mistakes—like exiting equities and hoarding cash and overinvesting in bonds.

The firm has also devoted a lot of time, money, and effort to developing absolute return funds, including target-date funds and 130-30 funds that go long and short securities. The firm runs $26 billion of alternative strategies. "Investors have this experience of going through the most volatile, difficult market we have experienced in our lifetime," he says. "So they're seeking strategies that will cushion them for unforeseen future events."

"The first half was more challenging, but the market really broadened out in the second half" to include gains in mid- and smaller-cap stocks, says JPMorgan's Quinsee. In fact, stock indices representing all sizes of companies and a range of investing styles finished the year in a much tighter range than is typical. The Russell 1000 Growth index climbed 15.3%, compared with a 17.5% gain for the Russell 1000 Value. As Quinsee points out, smaller companies did very well, with the Russell 2000 up 16.4% and the Russell Midcap Index up 17.7%.

Ironically, for all of the strong performance in equity mutual funds, retail investors stayed away, instead continuing to put their money into bond funds or even cash. Last year, equity funds had net outflows of $129 billion, according to Lipper, while $301 billion went into bond funds. Only in recent weeks, as the S&P 500 approached its five-year high, have flows into equity mutual funds started to turn positive. In January, equity funds saw $21 billion in inflows, while another $20 billion went into bond funds.

In spite of Putnam's strong showing, the firm still had net outflows in its equity funds in 2012, though the picture improved toward the end of last year.

Jim McNamara

Company: Goldman Sachs Asset Mgmt

Title: President and CEO of Goldman Sachs Mutual Funds

Total AUM: $742 billion

U.S. Retail Funds: 81

2012 Ranking: 5

Jim McNamara says investors are focusing on a few key areas.

Unable to earn much on bond holdings with interest rates so low, they want more income. As a result, the firm's clients are interested in income strategies with better yields than Treasuries, including high-yield, emerging-market debt and bank loans. At the same time, there's a realization that they need better overall growth in their portfolios. McNamara, 50, predicts that "equities will re-emerge as a source of growth in portfolios," reversing a five-year trend in which stock funds have been shunned.

McNamara, who splits his time between his home in Chicago and Goldman Sachs' New York headquarters, also sees a need for more go-anywhere funds that aren't constrained by a single benchmark. Those flavors of funds are important, he says, citing "higher levels of market volatility and also the realization that alpha opportunities clearly exist outside of traditional benchmarks." In other words, people need more options. He points to the Goldman Sachs Strategic Income fund (GSZAX), which invests across the bond market, and Goldman Sachs Dynamic Allocation (GDAFX), which mixes cash, bonds, commodities, and equities.

For Goldman's asset-management unit, big investing themes for 2013 include a housing recovery, secular growth in mobile computing. and a lessening of worries about the economic situation in Europe.

All that bond focus could lead to some disappointed investors. Yields are -- and were in 2012 -- at rock-bottom levels. The Barclays U.S. Aggregate index, a proxy for investment-grade debt, was up 4.2% last year, down from its 7.8% increase in 2011. The 10-year U.S. Treasury finished 2012 yielding about 1.9%, versus around 1.75% at the beginning of the year, a reflection of the Federal Reserve's ongoing policy to keep rates very low with quantitative easing. However, there was still money to be made in certain fixed-income sectors, such as high yield, municipals, U.S. corporate debt, and emerging-market corporate bonds.

"We were pro-risk for most of the year," says Michael Schoenhaut, who oversees several mixed-asset funds that blend bonds with stocks, including
JPMorgan Income Builder
(JNBAX),
JPMorgan Diversified
(JDVAX), and a series of target-date funds. On the debt side, that included overweighting emerging-market and high-yield debt.

When Barron's ran its first fund family ranking in 1996, emerging-market mutual funds were a niche area, and most investors had very little, if any, of their portfolios allocated to the developing world. Clearly, that's no longer the case. So, for the first time, we have included the performance of emerging-markets funds, which were included in the world equity category. We ran the numbers twice, and this addition only knocked most firms up or down a number or two, if at all. The top six firms were completely unaffected -- they would have been the top six even under our earlier model, but Aberdeen Asset Management leapt into the No. 7 spot, from 20th place, thanks to a strong performance from the
Aberdeen Emerging Markets
fund (ABEMX).

Led by London-based portfolio manager Devan Kaloo, the fund had a total return last year of 26.2%, beating 93% of its peers. For funds in any category, a key to success is avoiding big losses. In 2012's second quarter, amid considerable stock-market volatility, many emerging-markets funds were down 7% or 8%. The Aberdeen fund lost 4.4%. "We tend to protect better on the downside," says Kaloo. In 2011, the fund was down 11%, due in part to holdings in Turkish banks. Emerging markets had a poor showing in 2011 overall, with the MSCI Emerging Markets Index down 18.2%.

Robert Manning

Company: MFS Investment Management

Title: Chairman and Chief Executive

Total AUM: $338.3 billion

U.S. Retail Funds: 82

2012 Ranking: 9

Barron's doesn't offer an award for consistency. But if we did, MFS Investment Management would be a strong candidate.

The Boston-based money manager finished ninth in the 2012 rankings, its second straight year in the top 10—and the only firm to make it back to the top 10 from last year. In 2011, MFS finished 10th overall, with a solid showing across all five categories.

"My genetic makeup is to worry about the unexpected and to protect on the downside," says Manning, 49, an MFS lifer who started in 1984 as a high-yield bond analyst.

These days, he's cautious about both the bond and stock markets. "We don't have a fiscal cliff; we have a bond cliff," says Manning, who speaks with a distinctive Boston accent and is a diehard New England Patriots fan. With interest rates so low and all manner of bonds priced higher than ever in this ultralow-rate environment, "People need to be very careful about their fixed-income holdings," Manning says. When rates do move higher, bond prices will take a hit.

As for equities, Manning expects the next decade to be choppy, with low growth. "You want to own high-quality companies," he advises.

He offers a blunt assessment when asked about the U.S. fund industry's prospects. "It's a market-share game," he says. "If you have performance, you will grow and thrive. If you don't have performance, you will die."

Thanks to solid performance in recent years, MFS is alive and well.

But last year, Kaloo says, Turkey "got a sovereign upgrade, and earnings for the banks came through much stronger than anticipated." Those holdings include Akbank TAS (AKBNK.Turkey) and Turkiye Garanti Bankasi (GARAN.Turkey), both of which appreciated more than 40% last year. The fund also benefited from holdings in Mexico and the Philippines.

Though most investors would like their fund companies to perform equally well, no matter the kind of market, the vagaries of the market and, to be fair, the way the ranking is weighted, do play a role. 2011's top performer, Delaware Management, dropped to No. 49, thanks to underperforming funds in the U.S. equity, world equity, and taxable-bond categories. Vanguard Group, No. 2 last year, fell to No. 31, owing to underperformance in mixed-asset and taxable bonds. State Farm Investment Management, No. 5 in last year's survey, fell to No. 61, due to poor relative performance in both equity categories as well as balanced funds.

MainStay Funds, No. 7 last year, fell all the way to No. 56, six places from the bottom. But the firm's long-term record is impressive, as the firm noted in a statement that downplayed its 2012 returns. MainStay placed first in our 10-year ranking, an impressive feat.

The difference between a strong finish and a disappointing one isn't always that pronounced. Neuberger Berman dropped to No. 53 this year, close to the bottom of the one-year ranking, compared with a third-place finish a year ago. But Neuberger placed 58th in the U.S. equity category, four spots from the bottom, in this year's ranking.

How We Rank the Fund Families

To qualify for the Barron's/Lipper fund survey, a group must have at least three funds in Lipper's general U.S.-stock category, as well as one in world equity, which combines global and international funds. We also require at least one mixed-asset (or balanced) fund, which holds stocks and bonds. Fund shops also must have at least two taxable-bond funds and one tax-exempt offering.

For the first time this year, we've included the performance of emerging-market funds in the world equity category. Each fund's returns are adjusted for 12b-1 fees, which are used for marketing and distribution expenses. The funds usually add these fees back into returns. Our aim is to measure the manager's skill. Fund loads, or sales charges, aren't included in the calculation of returns, either.

Each fund's return is measured against those of all funds in its Lipper category (such as small value). That leads to a percentile ranking, with 100 the highest and 1 the lowest, which is then weighted by asset size relative to the fund family's other assets in its general classification—world equity, for instance. If a family's biggest funds do well, that boosts its overall ranking. Poor performance in a big fund can have a big effect on the ranking.

Finally, the score is multiplied by the weighting of its general classification, as determined by the entire Lipper universe of funds. The category weightings for the one-year results: general equity, 34.9%; world equity, 16.3%; mixed-asset, 17.3%; taxable bonds, 27.2%; and tax-exempt bonds, 4.3%. The category weightings for the five-year results: general equity, 36.36%; world equity, 15.73%; mixed-asset, 16.9%; taxable bonds, 26.37% and tax-exempt bonds, 4.64%. The category weightings for the 10-year results: general equity, 39.05%; world equity, 14.72%; mixed-asset, 14.76%; taxable bonds, 26.21%; and tax-exempt bonds, 5.27%.

The scoring: Say a company has a fund in the general U.S. equity category that has $50 million in assets and that it accounts for half of the company's assets in that category. Its ranking is the 75th percentile. The first calculation would be 75 times 0.50, which comes to 37.5. That score is then multiplied by 38.04, general equity's overall weighting in Lipper's universe. So it would be 37.5 times 0.3804, which totals 14.265. Similar calculations are done for each fund in our study. Then, all the numbers are added up for a total score. The fund shop with the highest score wins, both for every category and overall. The same process is repeated for the five- and 10-year rankings based on their weightings.

This survey is asset-weighted, which means that underperformance in a fund that accounts for a big chunk of a fund family's assets in a category will hurt the ranking, often considerably -- and vice versa. That was especially true for the
Neuberger Berman Genesis
fund (NBGAX), a small-cap growth portfolio that has been run very successfully for many years by Judith Vale and Robert D'Alelio. The managers troll for steady companies that generate strong free cash flow. Its 10-year annual return of 12% ranks in the top 18% of its Lipper peer group.

Last year, though, the portfolio was up 10% -- hardly a disaster, but lagging 85% of its peers. The $12.5 billion fund accounts for roughly half of Neuberger Berman's U.S. equity assets used to tally this ranking. So the fund's underperformance had a big impact on the fund family's overall ranking.

Genesis was overweight energy and consumer staples, both costly misses in 2012. And unlike 2011, when steadier, less cyclical names worked better and Genesis had a much stronger showing -- last year the fund was on the outside looking in at the hotter parts of the market like financial companies. "2012 was the opposite of 2011. Leverage worked. Cyclicals worked," says Joseph Amato, president and chief investment officer of Neuberger Berman. "To their credit, they didn't change what they do, which avoids you getting whipsawed."

For Putnam, of course, the reverse was true. Key funds that underperformed in 2011 came back to life in 2012. But the firm had strong performance across most of its funds, save for tax-exempt bond funds, which ranked No. 30, in the middle of the pack. That's a welcome respite from last year, when weak performance in virtually every category pinned the firm in second-to-last place.

Good-performing stock funds in 2012 included
Putnam Equity Income
(PEYAX), up 19.3%. Another fund that bounced back was
Putnam Fund for Growth &amp; Income
(PGRWX), which lost 4.9% the year earlier. Heading into 2012, Robert Ewing, who helms the large-cap value portfolio, was overweight financials, industrials, and some materials companies and stayed away from consumer-staple stocks and utilities. One holding that helped boost the fund's 2012 performance was
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(JPM), which was up 36% last year, including reinvested dividends. The bank has "done a very nice job navigating the last five years of global volatility," says Ewing.

Putnam also had a good year in taxable bonds, as evidenced by the
Putnam Income
fund (PINCX), up 11% last year and in the top 10% of its category. Steering clear of Treasuries, the fund benefitted from private-label mortgages and issuances that pay only interest from pools of mortgages, among other holdings, according to lead portfolio manager Michael Salm. "We are comfortable in risky assets," Salm says. "You don't get paid to own the assets that the Fed owns."

Reynolds, a longtime senior Fidelity executive who took over Putnam nearly five years ago, attributes the firm's strong showing in part to adding more seasoned research analysts and to revamping the pay incentives for portfolio managers and analysts (moves he also made at Fidelity Investments, No. 22). Those employees now get paid in part based on how well they perform against competitor funds, based on three-year returns. "That aligns us with what people hire us for," says Reynolds.

Coming in second behind Putnam was Pimco/Allianz, which placed No. 3 in the taxable-bond category. "2012 was a bottom-up, bond-picking year," says Mark Kiesel, who runs the
Pimco Investment Grade Corporate Bond
Fund (PIGIX), whose 2012 total return of 15% was at the very top of its Lipper group. "We picked the right companies in the right sectors."

Kiesel, who was recently named Morningstar's 2012 fixed-income manager of the year, says the fund had success holding debt of the major banks like Wells Fargo, JPMorgan Chase, and Citigroup, as well as companies with links to the housing recovery like Whirlpool. The $10.7 billion fund also held a slug of nonagency mortgages.

"No one was forecasting a turn in housing" at the end of 2011, says Kiesel, adding that nonagency mortgages were very cheap at the start of 2012. "We turned bullish on [housing] very early." Another bond sector that worked was gaming, including debt issued by Las Vegas Sands and Wynn Resorts.

One of Pannell's colleagues, Michael Carmen, who runs Hartford Growth Opportunities, made what turned out to be a shrewd decision about two-thirds of the way through last year: He underweighted
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(AAPL). After peaking last September a little north of $700, Apple sold off heavily in the fourth quarter and finished the year at around $532, having lost nearly 25% of its value. "It's obviously a great company, and they've accomplished a lot over the last decade, but I do think their moment in the sun is waning," says Carmen.

Carmen's fund was up 26.5% last year, besting 98% of its peers. It did well with positions in
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(AMZN), up 45%, and eBay, up 68%. "Last year, there were a lot of places to make money and a lot of places to lose money," Carmen says. "Half the battle is avoiding the losers."

Ranked No. 4 in the tax-exempt category, Hartford got a boost from the
Hartford Municipal Real Return
fund (HTNAX), up 8.5% last year and near the top of its category. "There were relatively benign credit conditions for most of the universe, despite some headlines, just like the rest of the economy," says Timothy Haney, who runs the fund.

Alas, one year is not the only prism through which fund families can be analyzed. JPMorgan finished first in the five-year survey, followed by Ivy Investment Management, Delaware Management, Virtus Investment Partners, and Franklin Templeton. The bottom five fund families in that ranking were SEI Group, Hartford, DWS Investments, Pioneer Investment Management, and Russell Investment Group.

In the 10-year ranking, meanwhile, MainStay Funds came out on top, Ivy came in second, and JPMorgan was third. The worst performers in the 10-year ranking were Calvert Investments, PNC Funds, and SEI Group, which finished last.

Of course, those rankings aren't as volatile as the one-year ranking, where the wrong under- or overweighting can make a big difference. Just how well the so-called "risk-on" trade works this year, however, will go a long way in determining next year's winners and losers.